DOCSLIB.ORG

Redalyc.Chicago, Keynes and Fiscal Policy

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Redalyc.Chicago, Keynes and Fiscal Policy Investigación Económica ISSN: 0185-1667 [email protected] Facultad de Economía México Pérez Caldentey, Esteban Chicago, Keynes and Fiscal Policy Investigación Económica, vol. LXII, núm. 246, octubre-diciembre, 2003, pp. 15-45 Facultad de Economía Distrito Federal, México Available in: http://www.redalyc.org/articulo.oa?id=60124601 How to cite Complete issue Scientific Information System More information about this article Network of Scientific Journals from Latin America, the Caribbean, Spain and Portugal Journal's homepage in redalyc.org Non-profit academic project, developed under the open access initiative Investigación Económica, Vol. LXII, 246, octubre-diciembre, 2003, pp. 15-45 Chicago, Keynes and Fiscal Policy ESTEBAN PÉREZ CALDENTEY* INTRODUCTION During the early 1930’s both Keynes and the Chicago economists advanced a policy of public works as a way to overcome depressions.1 They argued in favor of a counter cyclical fiscal policy to dampen variations over the phases of the economic cycle. Chicago economists drew on a historical tradition that linked monetary and real variables and their point of view applied to a broad range of scenarios.2 Keynes’s case for public works was developed initially to overcome the limitations imposed by laissez faire economic policies and was later Received August 2002; accepted May 2003. * Economic Affairs Officer, ECLAC (Port-of-Spain, Trinidad and Tobago). The opinions herein expressed are those of the author and may not coincide with those of the organization to which he is affiliated. Thanks are due to Nancy Hope and Juan Carlos Moreno Brid for comments and suggestions, to Clifford Hope Jr. for useful bibliography on early American fiscal experiments and to two anonymous referees. The usual caveats apply. E-mail: [email protected]. 1 See, Davis (1968), Friedman (1984) and Tavlas (1997). 2 See Laidler (1999) for recent analysis of Chicago and Keynes on the trade cycle which includes some of their views on fiscal policy. 15 16 ESTEBAN PÉREZ CALDENTEY seen to be applicable to a special case, that of a gold standard exchange rate regime. Ultimately, it became a way of showing how autonomous expenditures can increase income, rather than prices, under less than full employment conditions. The theory and assumptions underlying both strands of thought were remarkably similar. Both adhered to some version of the quantity theory of money. In addition these economists thought that wages and, in general, costs of production were rigid and that the banking system and monetary policy tools were unsuitable for the task of stabilizing the economy. Chicago economists, in particular, viewed the instability of velocity and/ or the fragility and underdevelopment of the banking system as an important limitation on the effectiveness of monetary policy. Due to the impracticability of reducing costs and the current stage of institutional development they advocated an expansionary economic policy through fiscal means that could restore the level of profitability. The primacy of fiscal over monetary policy emanated thus from a combination of market imperfections coupled with important restrictions on the potency of monetary policy channeled via the banking system. Finally, Keynes and at least two of the Chicago economist here considered (Paul Douglas and Aaron Director) justified the impact of public spending on the level of output by having recourse to Kahn’s multiplier. Both Chicago economists and Keynes eventually abandoned the idea of reflationary policies as a fundamental stabilization tool, but for reasons that were diametrically opposite. The former took the theoretical foundations of the quantity theory to their full development and became concerned with the inflationary dangers associated with a fiscal expansion. Moreover, in the absence of well-defined fiscal rules, expansionary policies could well be used pro rather than counter cyclically fueling thus an inflationary process. Over time, as the belief that the economy operated close to full employment levels of output gained prominence among Chicago economists and their followers, fiscal policy lost its relevance. In fact, it became relegated to “a technique for the exercise of monetary policy”.3 3 See, Warburton [(1945-1956), (1966)], p. 237. CHICAGO, KEYNES AND FISCAL POLICY 17 For his part Keynes extended the logic of the separation of expenditure categories of The General Theory of Employment, Interest and Money [(1936),(1964)] (GT, hereafter) to include the government and fiscal policy in his analysis. In the same way that he separated these categories into an income dependent category (consumption) and an income independent expenditure category (investment), he distinguished between a current (government consumption) and a capital budget (investment). Within this framework the current budget was to be in equilibrium, or show a surplus, to finance the expenditures of the capital budget which played the stabilizing role over the economic cycle. For Keynes, capital budgeting was a fiscal strategy aimed at maintaining economic equilibrium rather than curing disequilibrium (i.e., deficit budgeting). On this ground he opposed a policy of public works and the use of taxation to change the patterns of consumption in the short run while favoring the use of automatic fiscal stabilizers and, especially, capital expenditures to compensate cyclical fluctuations. Keynes’s fiscal policy views were elaborated under a key assumption of the GT, that of capital scarcity. As long as the stock of capital was inadequate any increase in investment would yield a positive return and be beneficial to the welfare of society. Once the point of capital saturation was reached investment would be wasteful and thus unnecessary. At this juncture fiscal policy would change its focus from the regulation of investment to that of consumption. This paper is divided into four parts. The first part analyzes the early Chicago view on the business cycle and monetary and fiscal policy. The second provides a summary of the evolution of Keynes’s thought on public works, deficit spending and counter cyclical fiscal policy in general. The last two sections examine Keynes’s thought on these fiscal issues prior to and following the publication of the GT. The paper does not contemplate Keynes’s views on fiscal policy in the GT. CHICAGO ECONOMISTS, THE BUSINESS CYCLE AND FISCAL POLICY Chicago economists Aaron Director and Paul Douglas (1892-1976), Frank Knight (1885-1972), Henry Simons (1899-1946) and Jacob Viner (1892- 18 ESTEBAN PÉREZ CALDENTEY 1970)4 advocated during the Great Depression public works and government spending to revamp the stagnant United States economy. Three premises formed the basis for their policy recommendations. First, depressions arose from a lack of synchronization between prices and costs, or more precisely between the supply and demand prices. Second, cost and/or prices exhibited a rigid downward structure. Third monetary policy was ineffective. Either the institutional configuration of the financial system was inadequate, the monetary policy instruments useless, or velocity (the demand for money) was unstable, and thus changes in the money supply would not necessarily have, per se, a predictable effect on prices. The logical conclusion was that fiscal policy was the main tool to bring about an economic recovery. The Chicago approach to the business cycle is aptly summarized by Simons [(1934), (1962), p. 55]: When for any reason business earnings become abnormally favorable, bank credit expands, driving sensitive product prices farther out of line with sticky, insensitive costs; earnings become more favorable; credit expands farther and more rapidly; and so on and on, until costs finally do catch up, or until some speculative flurry happens to reverse the initial maladjustment. When earnings prospects are unpromising, credit contracts and earnings become still smaller and more unpromising. In an economy where costs (especially wages, freight rates, and monopoly prices in basic industries) are extremely inflexible downward, the deflation might continue indefinitely... According to this view, the triggering factor of changes in the business cycles were entrepreneurs’ profits or losses accompanied by a credit 4 Knight, Viner and Simons are considered the founders of the Chicago School of economics. However, as Viner wrote, in a letter to Don Patinkin in 1981, he became aware of the tenents of the Chicago school and its label after he left the university in 1946 and adopted that label in 1951: “It was after I left Chicago in 1946 that I began to hear rumors about a ‘Chicago School’ which was engaged in organized battle for laissez faire and ‘quantity theory of money’ and against ‘imperfect competition’ theorizing and ‘Keynesianism’. I remained skeptical about this until I attended a conference sponsored by University of Chicago professors in 1951” [Reder, (1982), p. 7, Footnote 19]. CHICAGO, KEYNES AND FISCAL POLICY 19 expansion (contraction) and a disparity between prices of final goods and costs. The initial determinants of profits are not identified with precision at the start of an economic expansion, but the reference to speculative flurry placed expectations in the role of a key variable in the downturn phase of the economic cycle. The upward or downward movement of the cycle was amplified by the banking system. Finally, the misalignment between prices and a downward rigid cost structure perpetuated the conditions for an economic boom
Load more

Recommended publications
  • Fiscal Policy in an Unemployment Crisis∗
    Fiscal Policy in an Unemployment Crisis∗ Pontus Rendahly University of Cambridge, CEPR, and Centre for Macroeconomics (CFM) April 30, 2014 Abstract This paper shows that large fiscal multipliers arise naturally from equilibrium unemploy- ment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which fiscal policy may be efficacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing inflation. Keywords: Fiscal multiplier, liquidity trap, zero lower bound, unemployment inertia. ∗The first version of this paper can be found as Cambridge Working Papers in Economics No. 1211. yThe author would like to thank Andrea Caggese, Giancarlo Corsetti, Wouter den Haan, Jean-Paul L'Huillier, Giammario Impulitti, Karel Mertens, Emi Nakamura, Kristoffer Nimark, Evi Pappa, Franck Portier, Morten Ravn, Jon Steinsson, Silvana Tenreyro, and Mirko Wiederholt for helpful comments and suggestions. I am grateful to seminar participants at LSE, Royal Economic Society, UCL, European Univer- sity Institute, EIEF, ESSIM 2012, SED 2013, Bonn University, Goethe University, UAB, and in particular to James Costain, and Jonathan Heathcote for helpful discussions and conversations. Financial support is gratefully acknowledge from the Centre for Macroeconomics (CFM) and the Institute for New Economic Thinking (INET).
    [Show full text]
  • An Assessment of Modern Monetary Theory
    An assessment of modern monetary theory M. Kasongo Kashama * Introduction Modern monetary theory (MMT) is a so-called heterodox economic school of thought which argues that elected governments should raise funds by issuing money to the maximum extent to implement the policies they deem necessary. While the foundations of MMT were laid in the early 1990s (Mosler, 1993), its tenets have been increasingly echoed in the public arena in recent years. The surge in interest was first reflected by high-profile British and American progressive policy-makers, for whom MMT has provided a rationale for their calls for Green New Deals and other large public spending programmes. In doing so, they have been backed up by new research work and publications from non-mainstream economists in the wake of Mosler’s work (see, for example, Tymoigne et al. (2013), Kelton (2017) or Mitchell et al. (2019)). As the COVID-19 crisis has been hitting the global economy since early this year, the most straightforward application of MMT’s macroeconomic policy agenda – that is, money- financed fiscal expansion or helicopter money – has returned to the forefront on a wider scale. Some consider not only that it is “time for helicopters” (Jourdan, 2020) but also that this global crisis must become a trigger to build on MMT precepts, not least in the euro area context (Bofinger, 2020). The MMT resurgence has been accompanied by lively political discussions and a heated economic debate, bringing fierce criticism from top economists including P. Krugman, G. Mankiw, K. Rogoff or L. Summers. This short article aims at clarifying what is at stake from a macroeconomic stabilisation perspective when considering MMT implementation in advanced economies, paying particular attention to the euro area.
    [Show full text]
  • A Primer on Modern Monetary Theory
    2021 A Primer on Modern Monetary Theory Steven Globerman fraserinstitute.org Contents Executive Summary / i 1. Introducing Modern Monetary Theory / 1 2. Implementing MMT / 4 3. Has Canada Adopted MMT? / 10 4. Proposed Economic and Social Justifications for MMT / 17 5. MMT and Inflation / 23 Concluding Comments / 27 References / 29 About the author / 33 Acknowledgments / 33 Publishing information / 34 Supporting the Fraser Institute / 35 Purpose, funding, and independence / 35 About the Fraser Institute / 36 Editorial Advisory Board / 37 fraserinstitute.org fraserinstitute.org Executive Summary Modern Monetary Theory (MMT) is a policy model for funding govern- ment spending. While MMT is not new, it has recently received wide- spread attention, particularly as government spending has increased dramatically in response to the ongoing COVID-19 crisis and concerns grow about how to pay for this increased spending. The essential message of MMT is that there is no financial constraint on government spending as long as a country is a sovereign issuer of cur- rency and does not tie the value of its currency to another currency. Both Canada and the US are examples of countries that are sovereign issuers of currency. In principle, being a sovereign issuer of currency endows the government with the ability to borrow money from the country’s cen- tral bank. The central bank can effectively credit the government’s bank account at the central bank for an unlimited amount of money without either charging the government interest or, indeed, demanding repayment of the government bonds the central bank has acquired. In 2020, the cen- tral banks in both Canada and the US bought a disproportionately large share of government bonds compared to previous years, which has led some observers to argue that the governments of Canada and the United States are practicing MMT.
    [Show full text]
  • Fiscal Policy in a Monetary Policy Perspective Björn Lagerwall the Author Works in the Riksbank’S Monetary Policy Department1
    NO 5 2019 Economic 27 May Commentaries Fiscal policy in a monetary policy perspective Björn Lagerwall The author works in the Riksbank’s Monetary Policy Department1 In Sweden and many other countries, the framework for stabilisation policy prior to the global financial crisis was aimed at monetary policy playing the lead role and fiscal policy playing a more passive role. But in the wake of the global financial crisis, this view has at least partly been reassessed – towards greater focus on fiscal policy. What are in fact the arguments for this reassessment? We will look Prior to the global financial crisis, more closely at some of them in this Economic Commentary, based on recent the framework for stabilisation research and discussion both internationally and in Sweden. policy, in both Sweden and many One argument has to do with low global interest rates having reduced the other countries, gave monetary scope of monetary policy to, where necessary, provide further stimulus to the policy the lead role. Afterwards, this view has been partly economy. But the low interest rates can also increase the scope of fiscal policy to reassessed – towards a greater stimulate the economy without jeopardising the sustainability of public finances. focus on fiscal policy. Based on Another argument is that many empirical studies have shown that the effects on recent research and discussion, two main reasons for why this household consumption of temporary fiscal policy stimuli may be significantly view has changed can be greater than previously thought. identified, both of which are This Economic Commentary also discusses the interaction between fiscal and discussed in this Economic .
    [Show full text]
  • Fiscal Policy and Inflation Volatility
    WORKING PAPER SERIES NO. 317 / MARCH 2004 FISCAL POLICY AND INFLATION VOLATILITY by Philipp C. Rother WORKING PAPER SERIES NO. 317 / MARCH 2004 FISCAL POLICY AND INFLATION VOLATILITY1 by Philipp C. Rother 2 In 2004 all publications will carry This paper can be downloaded without charge from a motif taken http://www.ecb.int or from the Social Science Research Network from the €100 banknote. electronic library at http://ssrn.com/abstract_id=515081. 1 I thank Silvia Ardagna, Jürgen von Hagen, colleagues at the ECB and an anonymous referee for helpful comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the European Central Bank. 2 European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main. Fax: +496913446000. Tel: +491613446398. Email: [email protected] . © European Central Bank, 2004 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non- commercial purposes is permitted provided that the source is acknowledged. The views expressed in this paper do not necessarily reflect those of the European Central Bank. The statement of purpose for the ECB Working Paper Series is available from the ECB website, http://www.ecb.int. ISSN 1561-0810 (print) ISSN 1725-2806 (online) CONTENTS Abstract 4 Non-technical summary 5 1. Introduction 7 2. Literature 8 2.1. Growth effects of inflation volatility 8 2.2.
    [Show full text]
  • Fiscal and Monetary Policy Working Together to Create an Economy That Behaves Reasonably Under All Conditions
    Fiscal Policy and Monetary Policy Following the 1989 collapse of the Soviet Union, many of the market from becoming dangerously severe. The people cited the United States’ free market as its key government primarily influences the economy through its advantage over the state-controlled economy of the use of the federal monetary and fiscal policies. USSR. Capitalism seemed to have won the day and many Americans reaped the benefits of an unfettered Fiscal Policy market. U.S. fiscal policy is simply how the government uses taxation and spending (i.e. the U.S. budget) to influence But it is a mistake to believe that our “free market” the economy. When the economy is running above or stands completely detached from the government. The below its optimal level, the government can alter the truth is the government uses numerous policies and budget to influence its level of output. plans to influence the economy and keep swings in the market from getting out of hand. If, for instance, the economy is on a powerful upswing and in danger of overheating, the government may Government and the Economy choose to raise taxes or decrease spending to remove The drawback to the fierce competition and effort some money from the market. Or, if the economy is required by capitalism is that the economy can be slow, the government might increase its spending as a subject to boom and bust cycles. When an economy is way to create jobs until consumer demand rises. strong, people tend to spend more and invest in long- term plans.
    [Show full text]
  • Monetary and Fiscal Policy Interactions in a New Keynesian Model with Capital Accumulation and Non-Ricardian Consumers
    WORKING PAPER SERIES NO 649 / JUNE 2006 MONETARY AND FISCAL POLICY INTERACTIONS IN A NEW KEYNESIAN MODEL WITH CAPITAL ACCUMULATION AND NON-RICARDIAN CONSUMERS ISSN 1561081-0 by Campbell Leith 9 771561 081005 and Leopold von Thadden WORKING PAPER SERIES NO 649 / JUNE 2006 MONETARY AND FISCAL POLICY INTERACTIONS IN A NEW KEYNESIAN MODEL WITH CAPITAL ACCUMULATION AND NON-RICARDIAN CONSUMERS 1 by Campbell Leith 2 and Leopold von Thadden 3 In 2006 all ECB publications will feature This paper can be downloaded without charge from a motif taken http://www.ecb.int or from the Social Science Research Network from the €5 banknote. electronic library at http://ssrn.com/abstract_id=908620 1 Comments on an early version of this paper by Martin Ellison, George von Fuerstenberg, Heinz Herrmann, Leo Kaas, Jana Kremer, Eric Leeper, Massimo Rostagno, Andreas Schabert, Harald Uhlig as well as seminar participants at the European Central Bank, the Deutsche Bundesbank, the University of Konstanz, the CEPR-conference on “The implications of alternative fiscal rules for monetary policy” (Helsinki, 2004), and at the annual meetings of the Econometric Society (Madrid, 2004), the German Economic Association (Dresden, 2004), and the Royal Economic Society (Nottingham, 2005) are gratefully acknowledged. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the European Central Bank. 2 Department of Economics, Adam Smith Building, University of Glasgow, Glasgow G12 8RT, United Kingdom; e-mail: [email protected] 3 European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany; e-mail: [email protected] © European Central Bank, 2006 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved.
    [Show full text]
  • Central Bank Independence and Fiscal Policy: Incentives to Spend and Constraints on the Executive
    Central Bank Independence and Fiscal Policy: Incentives to Spend and Constraints on the Executive Cristina Bodea Michigan State University Masaaki Higashijima Michigan State University Accepted at the British Journal of Political Science Word count: 12146 Abstract Independent central banks prefer balanced budgets due to the long-run connection between deficits and inflation and can enforce their preference through interest rate increases and denial of credit to the government. We argue that legal central bank independence (CBI) deters fiscal deficits predominantly in countries with rule of law and impartial contract enforcement, a free press and constraints on executive power. More, we suggest that CBI may not affect fiscal deficits in a counter-cyclical fashion, but, rather, depending on the electoral calendar and government partisanship. We test our hypotheses with new yearly data on legal CBI for 78 countries from 1970 to 2007. Results show that CBI restrains deficits only in democracies, during non-election years and under left government tenures. 1 1. Introduction In the 1990s countries worldwide started to reform their central bank laws, removing monetary policy from the hands of the government. This means that the newly independent central banks can change interest rates, target the exchange rate or the money supply to ensure price stability or low inflation1, without regard to incumbent approval ratings or re-election prospects. Because central bank independence (CBI) has been designed as an institutional mechanism for keeping a check on inflation, most analyses focus on the effect of such independence on inflation and its potential trade-off with economic growth (Grilli 1991, Cukierman et al.
    [Show full text]
  • What Fiscal Policy Is Effective at Zero Interest Rates?
    Federal Reserve Bank of New York Staff Reports What Fiscal Policy Is Effective at Zero Interest Rates? Gauti B. Eggertsson Staff Report no. 402 November 2009 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the author and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author. What Fiscal Policy Is Effective at Zero Interest Rates? Gauti B. Eggertsson Federal Reserve Bank of New York Staff Reports, no. 402 November 2009 JEL classification: E52 Abstract Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages people to save instead of spend at a time when more spending is needed. Fiscal policies aimed directly at stimulating aggregate demand work better. These policies include 1) a temporary increase in government spending; and 2) tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply, such as an investment tax credit or a cut in sales taxes. The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today.
    [Show full text]
  • FISCAL POLICY and INFLATION Chronic Inflation Has Been The
    FISCAL POLICY AND INFLATION W. Fred Woods Assistant Deputy Director, SEA-Extension, USDA Chronic inflation has been the outstanding feature of the United States economy for more than a decade. It is our foremost economic ill as we approach the 1980s. Inflation has decimated consumer pur- chasing power, inhibited business investment, and weakened our export competitiveness. Since last December, consumer prices have risen at an annual rate of 131/2 percent, a sharp acceleration from the 9 percent of 1978, and almost double the 1977 inflation rate. Earlier this year, a major element in inflation was the rise in food prices. Bad weather and strikes pushed the food component of the Consumer Price Index to a 20 percent annual rate of increase. But increasingly inflation has come from rising energy prices. In January and February of this year, some 30 percent of the in- crease in consumer prices resulted from the rise in food prices. Only 10 percent was attributable to increased energy costs. By May, the proportions were exactly reversed. Since the beginning of 1979, energy product prices at retail have gone up at about a 40 percent annual rate. This is more than three times faster than the rest of the items in the Consumer Price Index. This year's inflation has stemmed in large degree from forces not directly related to current levels of demand, but rather from those forces which were unpredictable and over which we had little if any control. The Development of Chronic Inflation Let's look away from the present situation to the beginnings of our era of chronic inflation.
    [Show full text]
  • Mii WORKING PAPERS in ECONOMIC HISTORY
    rIa1 London School of Economics Br Political Science . mII WORKING PAPERS IN ECONOMIC HISTORY . SHORT-TERMISM ON TRIAL: AN EMPIRICAL APPROACH Breht Feigh Number: 19/94 July 1994 Working Paper No. 19/94 Short-termism on Trial: An Empirical Approach Brebt Feigb IDBreht Feigh, July 1994 c/o Economic History Department, London School of Economics. Breht Feigh c/o Department of Economic History London School of Economics Houghton Street London WC2A 2AE United Kingdom Phone: +44 (0)71 955 7084 Fax: +44 (0)71 955 7730 Additional copies of this working paper are available at a cost of £2.50. Cheques should be made payable to 'Department of Economic History, LSE' and sent to the Departmental Secretary at the address above. Short-tennism on Trial: An Empirical Approach The Macmillan Gap has been in existence since the virtual disappearance of the individual capitalist and the private banker. .. J.B. Kinross The Finance of Small Business May 1938 ... without facts we can do nothing: but with facts, until they have been passed through the mill of thought and their lessons educed from them by reason, we can still do nothing. A.C. Pigou In Memoriam: Alfred Marshall April 1925 I. Introduction The influence of the private banker on industrial development and economic growth has been the subject of considerable historical debate. I . Bradford De Long asked "Did I.P. Morgan's Men Add Value?" (De Long 1991). The debate has questioned whether the fmance capitalists of the late nineteenth and early twentieth centuries were either visionaries building firms which benefited from their entrepreneurial abilities or rather robber barons creating furns which extracted monopoly profits as a result of industry dominance.
    [Show full text]
  • Who Anticipated the Great Depression? Gustav Cassel Versus Keynes and Hayek on the Interwar Gold Standard
    DOUGLAS A. IRWIN Who Anticipated the Great Depression? Gustav Cassel versus Keynes and Hayek on the Interwar Gold Standard The intellectual response to the Great Depression is often portrayed as a battle between the ideas of Friedrich Hayek and John Maynard Keynes. Yet both the Austrian and the Keynesian interpretations of the Depression were incomplete. Austrians could explain how a country might get into a depres- sion (bust following a credit-fueled investment boom) but not how to get out of one (liquidation). Keynesians could explain how a country might get out of a depression (government spending on public works) but not how it got into one (animal spirits). By contrast, the monetary approach of Gustav Cassel has been ignored. As early as 1920, Cassel warned that misman- agement of the gold standard could lead to a severe depression. Cassel not only explained how this could occur, but his explanation anticipates the way that scholars today describe how the Great Depression actually occurred. Unlike Keynes or Hayek, Cassel analyzed both how a country could get into a depression (deflation due to tight monetary policies) and how it could get out of one (monetary expansion). JEL codes: B22, B31, E32, E42, E58, F41 Keywords: Cassel, Keynes, Hayek, Great Depression, gold standard, depression, central banks, Keynesian, Austrian, monetarist. FROM THE VANTAGE POINT of early 1929, few economists be- lieved that the world economy would slip into the unprecedented catastrophe we now know as the Great Depression. The sharp deflation in prices between 1929 and 1932 was almost entirely unanticipated (Cecchetti 1992, Hamilton 1992, Evans and Wachtel 1993).1 And neither contemporary forecasters nor modern time-series I wish to thank David Laidler and three anonymous referees for very helpful comments.
    [Show full text]